In the souq of a small Iraqi town, I saw bags of tobacco leaf for sale. But the real attraction for customers was a booth stocked with well-known Western brands, of which I snapped this photo.
How did all these branded cigarettes make their way from the West to Iraq? They didn’t. They are among the more than one hundred billion fake Western brand cigarettes produced each year for the black market. What are the dynamics of the global tobacco black market, and what are its implications for public health, crime and taxation collection?
I answer these questions in my latest piece at Washington Post’s Wonkblog.
New research shows that legalization can make the black market larger rather than smaller
Human trafficking is one of the most revolting crimes on the planet, and it is therefore understandable that some governments have taken radical action to attempt to eliminate it, including legalizing prostitution. The argument, which seems sound on its face, is that expanding the supply of legal prostitution will draw demand away from the illegal market that relies on human trafficking. It is thus both surprising and important that new research from the London School of Economics shows that legalizing prostitution increases, rather than decreases, human trafficking.
This finding is stunning until one recognizes that demand for prostitution, gambling, drugs and the like is highly elastic. When the demand-suppressing effect of illegality is removed, demand can increase, sometimes dramatically. All of this new demand does not necessarily go to the legal market. Some new legal market entrants engage in the parallel black market some of the time (e.g., play legal slots at the casino by day and participate in illegal mob-run poker games at night). If the size of the newly legalized market is rapidly growing, these “fractional customers” can make the black market larger than it was in the pre-legalization period when all market participants were 100% reliant on the illicit market to meet their demand.
Other people may develop demands in a newly legalized market that over time lead them to move exclusively to the illegal market. For example, a man who begins going to prostitutes when sex work is legalized may realize over time that he wants to have sexual encounters in which he is physically abusive to prostitutes. He would then migrate to the black market where he can more easily indulge his violent propensities. Similarly, people who becomes addicted to a newly legalized drug may come to want to consume it so often and in such quantities that only the black market will meet their demands.
It has long been speculated that the phenomenon of legalization of a market growing a black market has already happened with gambling. There has clearly been an explosion of legal casinos, poker competitions, state-run lotteries etc., but no definitive research indicates whether the prevalence of illegal gambling has increased, reduced or stayed constant as a result. The new LSE research is I believe the first formal test of the possibility that legalization can grow a black market, and for prostitution it appears that it can (full paper here).
There is clearly more empirical work to be done in this area. But in the meantime, wise heads in the policy world will not take it as a given that legalizing something will necessarily shrink the black market.
h/t: Eric Voeten, who blogs at our sister site, the Ten Miles Square section of Washington Monthly.